Chapter 10, Problem 10.5APE

Ethics

Put yourself in the shoes of a company president: The extremely successful Launch of a new product has resulted in an additional $5 million in unexpected operating cash flows. You can think of several ways to use the extra $5 million.

  One alternative is to pay out a special dividend to the shareholders. As president, you are accountable to the board of directors, which is elected by the shareholders.

Rather than pay a dividend, you could repuix.ha.se shares of the company’s own stock. The stock seems currently to be underpriced, and by purchasing treasury shares you are distributing surplus cash to shareholders without giving them taxable dividend income.

  You could also pay a special year-end bonus to your employees. With 500 employees, that would average $10,000 per employee, quite a nice holiday bonus. After all, it was the employees’ hard work and dedication that earned the money in the first place.

  Or you could use the money to reinvest in the company. By reinvesting the money, it might be easier to continue the upward earnings trend in the future.

  Finally, you could approach the board of directors for a compensation adjustment of your own. It’s been a great year, and you are the president of the company. Shouldn’t you at least share in the success?

Required:

Determine how you would allocate the additional $5 million. Are there other areas in which to spend the money not mentioned in the above case? Is it ethical for the president to be directly compensated based on the company’s performance each year?